Prompt

This milestone involves creating a draft of the stock analysis and portfolio development sections of the final project. Use the providedspreadsheetto calculate your portfolio's standard deviation and theFinal Project Scenariosdocument.

Specifically, the followingcritical elementsmust be addressed:

1. Stock Analysis: In this section, you will select five stocks from the provided list and determine their values by applying an appropriate valuation model from the following options: price to multiple models (earning or sales), dividend valuation model, or free cash flow to equity valuation model.
   1. Determine the valueof each stock by using an appropriate model based on the characteristics provided for each stock; use each model at least once.
   2. Provide a rationale for thestock valuation methodyou chose for each stock. Cite specific information to support your decisions.
   3. Using the calculated valuation, the current market price, and historical performance, determine theexpected returnfor each stock.
2. Portfolio Development: In this section, you will develop a portfolio for a client (Ezra or Jacob and Rachel) based on the client's risk tolerance, return objectives, and liquidity objectives. You will select appropriate assets from the provided list.
   1. For the client,develop a portfoliofrom the list of assets provided that is informed by your analysis of the client's objectives and (if applicable) the stock valuation you determined.
   2. Calculate theexpected portfolio returnusing the CAPM (beta) model. Based on the risk tolerance and return objective of the client you didn't choose for this assignment, would you design an investment portfolio that has a higher or lower expected portfolio return, and why?
   3. Calculate theexpectedportfoliostandard deviation.Based on the risk tolerance and return objective of the client that you didn't choose for this assignment, would you design an investment portfolio that has a higher or lower expected standard deviation, and why?

You will use these scenarios and tables to complete the final project.

Client 1:

Ezra, age 26, is single. However, he is dating and preparing to get engaged. He will need roughly $5,000 for an engagement ring almost immediately, and expects he will need $10,000-$15,000 for the wedding in the next 12-24 months. He is currently employed and earns about $70,000 a year in salary. This salary is enough to cover all his taxes and normal living expenses of approximately $4,800. This leaves him with about $1,000 in savings each month ($350 to 401K, $650 to savings). He has been able to save roughly $15,000 to date in a 401K plan from work and about $20,000 in cash savings. His 401K plan has been invested 100% in the stock market, including some sector-specific funds. His other savings have been in interest-bearing savings and cash substitutes such as money market funds. He recently received a windfall of $60,000, and this prompted him to come to you for some advice.

The following are few of Ezra's comments to help guide your thoughts:

1. "I understand I am young, so I need to take on as much risk as I can."

2. "I am willing to lose 30-40% on my invested capital if the return is commensurate."

3. "I do like to have a decent sized cushion in the bank in case something happens at my job."

4. "I don't foresee my risk tolerance changing after I get married."

5. "Do you have any good stock tips?"

Client 2:

Jacob and Rachel, 53 and 52 respectively, are married with four children. Two of the children are currently in college, and two are in high school. They expect the other two children to attend college. The couple has done relatively well for themselves and earn roughly $275,000 before tax between the two of them, which equates to $190,000 after taxes. They live well below their means, and this should allow them to cover all of their children's college expenses out of pocket, but it will not leave much for them to save over the next six to eight years. Through savings and portfolio growth, they have managed to accumulate $900,000. To this point, they have been moderately aggressive (70-75% equities) with their portfolio, but they feel that they need to begin preparing the portfolio for partial retirement in eight years, and full retirement in 13 years.

1. "I know we still need to be somewhat aggressivewe could live until we're 90so we need to plan for some growth even in retirement."

2. "We definitely can't afford to take a big hit in our portfolio. We don't have enough time to recover."

3. "Our jobs allow us to work part-time in retirement, and we will probably do so as long as we are able."

4. "What do bond yields look like today?"

5. "I think we'll need to draw on 3-5% of our portfolio in retirement. We'd like to earn enough income from the portfolio to cover that.